Accounting for with Retainage and Progress Billing

Thinking Ledger
Jun 14
3 min read

Updated: 3 days ago

Construction accounting isn’t your typical bookkeeping—it has its own rules, rhythms, and risk factors. Among the most complex (and critical) areas are retainage and progress billing, two practices that dramatically impact how revenue is recognized, cash flow is managed, and project profitability is tracked.

Whether you’re a general contractor, subcontractor, or accountant managing construction books, this artcle walks you through how to handle these elements with clarity and compliance.

What is Progress Billing?

Progress billing refers to invoicing clients incrementally based on the percentage of work completed, rather than billing everything at once when a project is done.

Example:

Let’s say a $500,000 office renovation project spans 6 months. You agree to bill the client monthly based on work completed. If you're 30% done after month 2, you invoice $150,000.

Progress billing helps:

● Maintain cash flow throughout the project life cycle

● Provide transparency to clients

● Reduce billing disputes

What is Retainage?

Retainage (or retention) is a portion of the invoiced amount that is withheld by the client until the project (or a phase) is fully completed and approved. This protects clients from non-performance or defects.

Common structure:

● Retainage is typically 5% to 10% of each progress payment.

● Held until the final project walkthrough or a set milestone.

Example:

If you invoice $100,000 and the retainage is 10%, the client pays $90,000, and $10,000 is withheld. That $10,000 may only be paid after the full project is completed and signed off.

How to Account for Progress Billing and Retainage

Here’s how you handle the accounting side of things in a GAAP-compliant way.

1. Recognize Contract Revenue with ASC 606 (Revenue from Contracts with Customers)

ASC 606 requires that construction companies recognize revenue as performance obligations are satisfied, usually based on input/output methods.

🔹 Output Method Example:

Based on physical progress (e.g., 40% of building framed = 40% revenue recognized)

🔹 Input Method Example:

Based on cost incurred: If $200K of $500K budgeted costs are incurred, you may recognize 40% revenue.

🧮 Revenue recognized = Total Contract Value × % Completion

2. Accounting Journal Entries for Progress Billing

Let’s say you’ve completed 40% of a $500,000 project. Here's how to record it:

a. Recognize Revenue

Dr. Construction in Progress (CIP) $200,000

Cr. Revenue from Construction Contracts $200,000

b. Invoice the Client (Progress Billing)

Dr. Accounts Receivable $180,000

Dr. Retainage Receivable $20,000

Cr. Progress Billings on Contract $200,000

Note: Some firms use a contra account like “Progress Billings” to offset CIP.

3. Accounting for Retainage

Retainage receivable is not bad debt—it’s a collectible asset with a time delay. It should be recorded separately from A/R to avoid overstating available receivables.

Retainage Receivable Entry

When invoiced:

Dr. Retainage Receivable $20,000

Cr. Progress Billing $20,000

When collected:

Dr. Cash $20,000 Cr. Retainage Receivable $20,000

Managing Construction Contracts

Key Considerations:

● Use Job Costing: Track labor, materials, and overhead per job.

● Track Work in Progress (WIP) reports monthly to prevent overbilling or underbilling.

Consider using specialized tools like QuickBooks with Contractor Edition, Sage 100 Contractor, or Procore for better reporting.

Financial Statement Impact

Account	Impact
Construction in Progress	Asset (balance sheet)
Retainage Receivable	Asset (separate from A/R)
Progress Billing	Contra-asset or liability
Recognized Revenue	Income statement

Real-Life Anecdote

A mid-sized commercial contractor in Texas failed to track retainage separately and included it in their standard A/R aging report. As a result, they misjudged cash flow projections and delayed key payments to suppliers—leading to project delays and strained vendor relationships. Once retainage was split and tracked independently, visibility improved and planning stabilized.